Lundbergs' strong business risk profile stems from the good overall credit quality of its assets, most of which are investment grade. This should limit the magnitude of equity price fluctuations, reduce default risk, and subsequently, lessen the risk of equity losses. We consider Lundbergs' wholly-owned real estate operations to be low-risk, given their solid performance over the last decade, underpinned by residential properties (about 40% of the real estate portfolio in terms of rental income, about half of total 1,000,000 square meters total floor space) and low vacancy rates (consistently below 5%). Our ratings are further supported by the company's stable ownership structure--with the Lundberg family controlling more than 90% of the voting rights--and its track record of risk-averse investment strategies. In our opinion, these business positives are moderated by company's exposure to volatile equity markets, which may translate into fluctuations in its portfolio value, and somewhat restricted portfolio liquidity, given the significant proportion of majority-owned investments, and the substantial weight in the portfolio of unlisted real estate operations. Together with Lundbergs' stake in listed property company Hufvudstaden AB (not rated), real estate assets account for about one half of the total portfolio.

The modest financial profile reflects Lundbergs' consistent, prudent financial policy and strong capital structure. All the company's debt is located in its real estate operations, and we understand Lundbergs aims to maintain its debt below 50% of its own property portfolio market value (Swedish krona {SEK}12.7 billion on June 30, 2012). We calculate this would require a maximum loan-to-total portfolio value ratio of 12%-16%, based on an average weight of real estate assets representing 25%-30% of total assets in the past five years. In addition, all Lundbergs' listed holdings (about two-thirds of total assets) trade actively on the Stockholm Stock Exchange, providing the company with financial flexibility, which we consider to be integral to the ratings.

Key portfolio developments

Portfolio movements were limited over the period, with Lundbergs investing SEK18 million to acquire 510,000 series B shares in outdoor power products manufacturer Husqvarna AB (not rated), and SEK0.8 billion in the real estate operations, the bulk of which to acquire two commercial properties in Stockholm and Linkoping. Given Lundbergs' core focus on existing assets, and since we understand there are currently no major investments or disposals in its pipeline, we expect its portfolio composition to remain largely unchanged for the next two years, maintaining urrent liquidity, quality, and diversity descriptors according to our methodology.

S&P base-case cash flow and capital-structure scenario

We believe Lundbergs' loan-to-value (LTV) ratio is well placed at the 7% we calculated on Oct. 2, 2012. On that date, it would have taken a decline of about one-third in equity prices (meaning sensitivity excluding the real estate assets, for which valuations are more sticky) for our 15% threshold to be met. We believe operating cash generation, defined as dividend received less operating and interest expenses and dividend paid, which was about SEK0.1 billion in 2011 should be close to SEK0.3 billion in 2012, given the substantial growth in the amount of dividends received. We would expect dividend inflows from portfolio companies to be comparable with 2012 levels in 2013, operating and financial costs to be stable and dividends to shareholders to grow moderately. As a result, we expect total coverage--the ratio of dividends received to operating and net interest expenses plus dividends paid at holding company level--to be about 1.4x in 2012 and stable for the foreseeable future, versus 1.3x in 2011.

Liquidity

The 'A-1' short-term rating is supported by our assessment of Lundbergs'liquidity as "strong," as defined by our criteria. We anticipate that the company's sources of liquidity will cover its liquidity needs for the next 12 months well in excess of our 1.5x ceiling.

Pro forma the recent SEK1 billion bond issue on Sept. 20, 2012, we estimate total liquidity sources on June 30, 2012, at about SEK4.6 billion, including:

-- Available cash and equivalents estimated at about SEK1.8 billion (100% of reported cash, given the lean structure of the parent company);

-- SEK2.0 billion of undrawn committed lines, of which SEK1.0 billion available until June 2015 and SEK1.0 billion until December 2017. The June 2015 facility has financial covenants (interest cover and LTV), which the company currently comfortably meets; and

This compares favorably with Lundbergs' potential liquidity uses of about SEK1.8 billion over the next 12 months to end-June 2013, which include:

-- Short-term debt of SEK1.1 billion, with no debt maturities in the subsequent 12 months, and only SEK400 million maturing in the second half of 2015;

-- Operating and net interest expenses of some SEK0.2 billion; and -- A dividend payout to shareholders of close to SEK0.5 billion. Outlook

The stable outlook reflects our view that Lundbergs will preserve its conservative capital structure and, therefore, retain its strong financial flexibility. We understand that Lundbergs aims to maintain leverage below 50% of the market value of its wholly-owned real estate operations (SEK12.7 billion on June 30, 2012) as part of its financial targets. The ratio was about 21% at midyear. We also believe that the company's overall LTV ratio will remain below 15%, which is commensurate with the current ratings.

If Lundbergs' LTV ratio were to exceed 15%, even slightly, for example, owing to an unexpected and significant decline in equity values for a sufficiently lengthy period, we would likely consider a negative rating action. Higher-than-expected leverage or materially increasing exposure to wholly- or majority-owned companies could have negative implications for the ratings on Lundbergs as well, because the increasing asset concentration would raise its vulnerability to operational and business risk.

The possibility of a positive rating action on Lundbergs is remote in the next two years, given the limited additional rating benefits of further portfolio investment diversification.